Client Update: May 2008

Foreign investment in State-owned telecommunications enterprises

In brief: As a
result of the Vietnamese Government's continuing economic reform agenda, foreign
investors are likely to be given the opportunity to become strategic investors
in major Vietnamese State-owned enterprises in the telecommunications industry
as part of the country's 'equitization' process. Senior Associate Ian Stewart
and Lawyer Daniel Allender, who both acted for Vietnamese insurer Bao
Viet in 2007 in the first equitization involving a strategic foreign investor,
comment on the current state of play and potential further developments.

As part of Vietnam's political and economic renewal agenda, referred to as
doi moi (or 'renovation'), the Vietnamese Government is converting thousands of
State-owned enterprises (SOEs) into shareholding
companies (a process known as 'equitization'), thereby creating opportunities
for investment in these equitized entities by parties other than the State.
Historically, SOEs have dominated many key business sectors in Vietnam,
including the banking, insurance and telecommunications industries.

The process of converting SOEs into shareholding companies is currently
regulated by Decree 109, which was passed by the Vietnamese Government in August
2007. To date, the equitization process has generally involved the majority of
shares in each newly established shareholding company being retained by the
State, with a small portion sold at public auction.

In addition, Decree 109 permits the allocation of shares by private placement
to 'strategic investors' (among others). Under Decree 109, strategic investors
are defined broadly to mean foreign and domestic investors with financial and
enterprise management capability who are capable of transferring benefits to an
enterprise and whose long-term interests are connected with that enterprise.

On 13 September 2007, Vietnam Insurance Corporation (more commonly known as
Bao Viet) created history when it became the first Vietnamese SOE to open its
doors to strategic foreign investment, entering into an agreement with HSBC to
acquire a 10 per cent stake in the insurer (a transaction which to date remains
one of the largest M&A transactions completed in Vietnam). As part of the
deal, HSBC obtained rights to increase its stake over time and secured
representation on the Bao Viet board in exchange for the provision of various
technical and advisory support.

The equitization of Bao Viet, the leading insurer in Vietnam and one of that
country's largest SOEs, attracted enormous interest from potential foreign
investors looking to capitalise on the opportunities presented by a country with
a large, relatively young population (of approximately 85 million) and very high
levels of economic growth.

Since HSBC's investment in Bao Viet, however, the aggressive timetable set by
the Government for the equitization of numerous other SOEs has been revised
because of delays in finalising existing equitizations (such as the Vietcombank
equitization) and amid concerns that the original timetable could result in a
glut of newly established businesses that the market would be unable to
support.

The Government has, however, reaffirmed that it is proposing to press on with
a number of equitizations during the next 12 months, including in respect of
mobile phone operators Vinaphone Telecommunication Services Co.
(Vinaphone) and Vietnam Mobile
Telecommunication Services Co. (more commonly known as
MobiFone). There are also suggestions that it may look
to make foreign investment as part of the equitization process more
attractive.

At present, operating licences in the telecommunications sector cannot be
obtained by foreign entities, and foreign entities are not otherwise permitted
to invest directly in Vietnamese telecommunications service providers.
Accordingly, to date, foreign investment in the telecommunications sector in
Vietnam has been limited to business co-operation contracts entered into between
investors and local telecommunications service providers.

Despite restrictions on foreign investment, growth in the telecommunications
sector in Vietnam is reported to have reached 30 per cent per annum in 2007.
Within this industry, MobiFone and Vinaphone are reported to be the second- and
third-largest mobile phone operators in Vietnam respectively, with more than 25
million registered users between them. Given Vietnam's large population, coupled
with relatively low market penetration in the telecommunications sector to date,
the potential equitization of these SOEs has, for some time, been attracting
significant interest.

While the equitisation of MobiFone and Vinaphone may provide foreign
investors the opportunity to invest in two of the largest telecommunications
service providers in Vietnam, investment through the equitization process (as it
currently stands) does present a number of challenges.

Price

Decree 109 provides that strategic investors must pay not less than the
average successful auction price paid by members of the public under the public
auction conducted as part of the equitization process. While there is an
argument that this price matching requirement can be waived by the State in
certain circumstances, to date the price matching requirements have been
strictly followed.

This has a number of potential consequences. Most obviously, it provides a
second pricing hurdle for a potential strategic investor who must not only
contend with the offers of other bidders, but also be prepared to match a price
determined by members of the general public (who are of course investing on a
much smaller scale). Significantly, it has recently been reported that State
officials are now considering a change to allow strategic investors to acquire a
stake at a discount to the public auction price.

And amid concerns that a number of equitized SOEs have previously been
overvalued in terms of reserve or 'floor' prices (resulting in reduced investor
interest at the time of public auction), it has also been suggested that
strategic investors may even be given an opportunity to assist in setting the
floor price for shares offered to the public.

Process

Furthermore, the price matching requirement has to date caused procedural
complications, for while SOEs have sought to engage in negotiations with
potential strategic investors before completion of the public auction, this has
resulted in investors being asked to make commitments without knowledge of the
final price they may be required to pay for their stake. Understandably,
investors have resisted doing so until the final auction price is determined,
which can sometimes take several months, thereby extending the overall timeline
for the deal's completion.

Recent comments made by State officials have also indicated that strategic
investors may in the future be permitted to acquire their stake prior to the
public auction occurring. These proposed changes (both in relation to pricing
and process) would, if implemented, make investment through the equitization
process more attractive to foreign investors.

Technical support

Finally, the ability to provide technical support is a requirement for
investors seeking to be considered a 'strategic investor' under Decree 109.
Decree 109 does not provide detailed guidance regarding what is required of
investors in relation to technical support. Accordingly, potential strategic
investors cannot rely on Decree 109 in order to determine the form and content
of the technical support which they may be required to provide. As a practical
matter, such support is likely to involve arrangements for the secondment of
employees with skills in particular areas in which the particular business
operates and the provision of extensive training, both industry specific and
aimed at improving general corporate governance.

In the context of the upcoming equitisation of MobiFone and Vinaphone, while
existing telecommunications operators may find it easier to put together a
technical support package that specifically addresses matters relevant to
telecommunications providers, other investors should not see this requirement as
an inevitable roadblock to investment via the equitization process.

For potential foreign strategic investors who are equipped to negotiate the
various challenges posed by investment through the current equitization process
in Vietnam, the proposed equitisations of Vinaphone and MobiFone over the next
12 months provide an opportunity to invest directly in the rapidly growing
telecommunications sector in Vietnam.